Banks Moving Currency Overseas Clamped Down Upon by China

As they attack one of the few loopholes remaining in the country’s strict new capital controls regime, Chinese regulators are stamping out moves by banks to shift renminbi out of the country.

The efforts of internationalising its currency — a goal that has taken a back seat to stabilising capital outflows and the renminbi’s depreciation against the dollar, thus faces another set back by this tightening as the former is a the Chinese government’s larger strategy.

Ensuring no net outflows of the Chinese currency, banks in Shanghai must “import” 100 yuan for every 100 yuan they allow a client to remit overseas, according to several people briefed on rules introduced this month. for every 100 yuan they brought back into China, Shanghai-based banks had been allowed to remit 60 yuan overseas.

Ensuring a net inflow into the capital banks in Beijing must import 100 yuan for every 80 yuan they remit overseas on behalf of clients. There was no comment made by the People’s Bank of China.

By selling down the country’s foreign exchange reserves, Chinese regulators have slowed the renminbi’s relatively rapid depreciation against the dollar as they have been concerned about the depreciation. The central bank and State Administration for Foreign Exchange have implemented a series of capital controls over recent months to preserve China’s forex stockpile, which stood at just over $3 trillion at the end of last year.

For China-based companies that wished to remit foreign currency for overseas acquisitions, the PBoC and Safe introduced stricter vetting procedures in November.

As were forex purchases by Chinese citizens, also subjected to tighter scrutiny were dividend payments and shareholder loan repayments by foreign investors.

One way to avoid new capital controls was remitting renminbi offshore, where it can be converted into foreign exchange. By encouraging companies to use it for trade transactions, shareholder loan repayments and dividend remittances, such transfers were also consistent with Beijing’s desire to promote the renminbi as an international currency.

“Chinese importers are having trouble paying trade invoices denominated in renminbi,” said one person briefed.

Net renminbi outflows from China plummeted as Chinese regulators close the loophole after it exceeded 265 billion yuan ($38.5 billion) in September, according to policy researcher NSBO. “The use of renminbi for foreign transactions, which had been used to evade capital controls, dropped sharply [in December] to its lowest level since September 2015,” NSBO said in a report.

Since they derive a higher percentage of revenues from cross-border business, overseas banks, whose domestic market share in China is tiny, have been more affected by the clampdown. “This regulation is a bigger nightmare for foreign banks because we are more reliant on cross-border business than Chinese banks,” one banker said.

Rather than in writing, the central bank and Safe are only communicating regulatory “window guidance” over the phone or during face-to-face meetings, bankers have also complained.

They added that Safe is checking their net renminbi flows on a weekly basis, compared with every month previously and has instructed banks not to inform clients why their overseas remittances are being rejected.

“It’s up to us to tell clients sorry, we can’t let you do the transfer,” the banker added. “But obviously the clients know what is going on. This is not a secret.”